The
following material is excerpted with written permission from How Smart
Growth Can Stop Sprawl, a briefing guide for funders by David Bollier.
The views expressed are those of the author. (Washington, D.C.: Essential
Books), 1998.

One of the least understood but most influential
forces propelling sprawl is the tax system, especially property taxes.
At all levels of government, usually in obscure ways, the tax system actually
encourages the deterioration of cities, flight to the suburbs, and construction
of low-density, cheap buildings. This dynamic is driven by local governments'
reliance on property taxes as the chief source of revenue, and by the fragmentation
of governance and land-use planning in a metro region. Neighboring metro
communities compete for property wealth through a tactic known as "fiscal
zoning." As Myron
Orfield explains:

Through fiscal zoning, cities deliberately develop
predominantly expensive homes and commercial industrial properties with
low service needs and limit less costly housing and entry to the community
by the people who normally buy it. In this way, these communities attempt
to limit social need and the demand on tax base that it can engender.1

Fiscal zoning produces three mutually reinforcing
results, writes Orfield: 1) Exclusive suburbs attract more businesses and
affluent residents, which helps them maintain low overall tax rates; 2)
Cities suffer from declining demographics, worsening social problems and
taxes, and further accelerating the flight of businesses and residents;
and 3) The developing suburbs that lose the fiscal zoning competition are
forced to bolster their tax bases by accepting virtually any kind of development,
despite its dubious character or long-term costs.

Apart from such intra-regional competition, the
property tax system perversely rewards land speculation by requiring higher
taxes on buildings than the land upon which they sit. James Howard Kunstler
-- a celebrated critic of sprawl through his two irreverent, incisive books
The Geography of Nowhere (1993) and Home from Nowhere (1996) -- explains
the deficiencies of this tax scheme: "Under this system, a rational person
has every reason to put up crappy buildings that will not be highly assessed,
or he has every reason to let his property run down, or build nothing at
all." Land owners are encouraged to hold property off the market and not
build -- driving up land prices in the meantime -- in the hope that they
can make a killing at some point in the future. Kunstler writes:

Our system of property taxes punishes anyone who
puts up a decent building made of durable materials. It rewards those who
let existing buildings go to hell. It favors speculators who sit on vacant
or underutilized land in the hearts of our cities and towns. In doing so
it creates an artificial scarcity of land on the free market, which drives
up the price of land in general, and encourages ever more scattered development,
i.e., suburban sprawl. In tandem with zoning, the taxing of buildings rather
than land itself promotes such wasteful practices as putting up cheap one-story
burger joints in huge parking lots on prime city land.2

Kunstler commends a more rational alternative, site-value
taxation, which levies a tax on real estate commensurate with the site's
potential value, regardless of what buildings may occupy the site.

Property taxes are not the only culprit for current
patterns of development, to be sure. Historically, Federal Housing Administration
rules have fostered flight from the city to the suburbs by favoring lending
for single-family homes (suburbs) but not multifamily units (cities). FHA
rules have also made it cheaper to buy a new home (suburbs) than to renovate
an older one (city).

Suburban migration has also been fostered for
decades by federal tax deductions for home mortgage interest, which essentially
subsidizes homeowners (suburbs) over renters (city). "This tax policy has
tended to encourage the construction of detached single-family houses,
most often in the suburbs," writes urban planner Douglas Kelbaugh in Common
Place. "This single tax provision costs the federal treasury an estimated
$50 to $90 billion a year, making it in effect the broadest and most expensive
welfare program in the U.S.A." 3
The home mortgage deduction significantly boosts demand for land in suburban-lot-sized
parcels.

Until recently, federal capital gains tax had
been another tax incentive encouraging land consumption and out-migration
from the city. Tax law required the reinvestment of equity from the sale
of a house in a residence of equal or greater value. Since there are relatively
few opportunities for middle-class homeowners to "trade up" to larger,
nicer houses within city limits -- but plentiful opportunities in the suburbs
-- federal tax law for decades encouraged homeowners to leave the city.
The repeal of this tax provision is a prime example of how tax policy can
be used to encourage more livable cities. Another way of encouraging
homebuyers to live in the city is to offer a tax credit to first time homebuyers.
That is what Washington, D.C. is promoting through its $5,000
Homebuyer Credit Act.

Inheritance taxes pose a special problem for farmers,
as sprawl dramatically increases the market value of their large holdings
of land. When farmers die, their heirs often have little choice but to
subdivide the property for new development in order to pay estate taxes.
This is a special problem in many parts of the Southeast and West, where
property values have soared as development migrates from the city. As older
landowners die in coming years, there will be a huge number of property
transfers that could stimulate powerful new rounds of sprawl. As discussed
in Farmland and Open
Space Preservation and Tax
Incentives, land trusts and other farm preservation strategies
can help mitigate this problem.

The Center
for Urban and Metropolitan Policy at the Brookings Institution is studying
how the complex web of federal and state programs, tax expenditures and
regulatory and administrative actions affect sprawl and urban disinvestment.
These include infrastructure spending, tax expenditures for home ownership,
tax incentives for employers' relocation and expansion; land use, planning,
zoning and building codes; the siting of government buildings; and federal
regulatory policies in the environmental, telecommunications and utility
industries.